Family businesses: the passing-on challenge
November 2024 /
Almost all family fortunes are the result of an entrepreneurial success story, often across generations.
Yet, despite numerous success stories, the challenge of transferring a family business remains daunting, with high failure rates and risks of conflict or even the collapse of a once-great legacy.
The Complex Nature of Family Business Transfers
Family-run businesses are, by their very nature, at the crossroads of two ever-changing worlds, the family and the business, which don’t always share the same operating methods or agenda.
That’s why handing over a family business requires courage and considering the 4 dimensions of such an operation: family, wealth, shareholding and operational.
Laying The Governance Foundation
When it comes to transferring family businesses, there is an imperative need to look beyond the legal and tax aspects of the transfer, and to focus upstream on the underlying motivation for it: what is the intended goal?
Simon Sinek famously refers to ‘Start with why?’, stating that a good organization (in this case the family) needs to communicate in an inside-out way (why first, how then, what at last), enabling the limbric brain to be involved and not just the rational brain.
These discussions, if well conducted, help to establish vision and values, sometimes called purpose or mission, which will be the cornerstone of the family’s’ and shareholders’ projects and the company’s project, notions not to be confused.
“When the things you say and the things you do are in alignment with what you actually believe, a thriving culture emerges”. Research has clearly highlighted the link between (corporate) purpose and performance, as long as there is consistency between what is said and what is done.
It is based on these projects that the more technical (i.e. legal and financial) points can then be scrutinized and agreed, such as the profit allocation, the liquidity of shares, the opening up of capital to third parties, the equilibrium of powers and counter-powers in the decision-making bodies, the strategic overview and risk management guidelines, the family’s career path within the company, the information to be communicated to family members, and so on.
Experts in family businesses are required to both identify the needs of the shareholder family and then implement them, using wisely the whole international toolbox available to align and carry out the family’s wishes.
Some Best Practices
Passing on implies both accepting a role and a mission of ‘passing on the baton’.
This burden very often involves making highly significant choices with a view to ensuring the long-term future for the family business and wealth, while paying the utmost attention to the expectations and aspirations of the company’s stakeholders.
The key objective is to enable each family member to find his/her place and position, and to grasp his/her role, as part of a long-term approach.
Practitioners highlight the benefits of setting up both family and shareholder awareness.
This enables everyone to clearly identify and distinguish between the decision-making bodies and be aware of possible developments (career paths) within the family group.
The governance body of an operating business is not the right place for decisions and talks relating to the governance of a family holding company, nor the right one for a family board, each of which is subject to different rules and procedures.
Ensuring efficient governance and fit distribution of powers and responsibilities is key.
Generally speaking, postponing endlessly operational handover is not a viable/sustainable strategy. The new generation(s) (NextGens) aspire to be active and take ownership at an increasingly early age, subject to legitimate requirements. Co-generational rather than inter-generational thinking has proven its virtues in practice, especially as everyone can contribute, irrespective of age.
We believe that if a company is to be successfully handed down, it is crucial to work consistently over the long term on family cohesion, and more especially on family shareholding, in order to achieve longevity. It is vital to work on the keys to shareholder commitment. This requires also an in-depth understanding and consideration of personal and professional aspirations.
Shareholder commitment needs to be even stronger in families where the operating business has gradually turned into an investment holding organization where the affectio societatis is per se weaker. Aligning investment strategies with the family’s overarching vision is essential, precisely to build or strengthen affectio societatis, as well as affectio familiae at large.
The Valuable Contribution Of External Parties
When dealing with these complex issues, academic research has clearly demonstrated the positive impact of third parties, who bring objectivity, specialized knowledge, and clarity to family decision-making process
They can be involved at key moments or over a longer or even permanent period in a wide variety of roles, for example as executives, independent directors/board members, members of committees (audit and risk, remuneration, CSR, innovation, etc.), trusted advisers, family HR, third-party assessors, whether for asset valuations or people assessments, etc.
On our side, Yours Business & Family Advisory already has a proven track record in providing bespoke services to number of families dealing with complex governance and structuring issues in cross-border environment and especially working with them in their reflections and family business transformations, as well as in the effective deployment of the actions decided upon.
We do offer support to families in their decision-making processes at key moments, providing an external, independent and objective look at the situation.
Please do not hesitate to contact us for further information.
